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Friday, May 27, 2016

The Strength of Regional Breweries

If you wanted to characterize brewery trends the in mid-teens, you could say "the rush to nationalization." Big, regional breweries are pushing out to establish a national footprint, many have begun to open far-flung facilities to make this possible, some are joining forces with other mid-sized breweries, and still others are selling part or all of their stake to multinational breweries. Everyone is thinking that the window to establish national craft brands is closing, and only those who get in now will be competitive. Being national seems like an obvious move. I wonder, though, if being a regional power isn't a smarter play?

Ninkasi's big tanks.

Curiously, this isn't the first rush to nationalize. At the outset, some breweries raced to become national brands, no doubt working on the model created by Budweiser and Miller et. al. Sam Adams, Sierra Nevada, Pete's Wicked, Rogue--these brands quickly shot out over the landscape. What they soon learned was that it was very hard to maintain a national network. Larger breweries, which have established distribution networks, relationships with large retailers, sales teams, and so on, do this very well. Little guys don't have the money, volume, or connections to build 50-state networks while brewing 50,000 barrels. In the 1990s, beer went through a re-set and breweries retrenched and focused on local markets.

Yesterday I visited Ninkasi for the first time in years, and while I gaped at all the recent growth, I chatted with founders Nikos Ridge and Jamie Floyd about business strategies. Ninkasi has always been focused on establishing a firm foothold in the Pacific Northwest, and while I don't think they would foreclose going national, that seems to be their near- and middle-term focus. While we were talking, I began to muse about the role of the dominant regional brewery in the future beer ecosystem.

Regional breweries have always existed. Even in the worst days of consolidation, the Yuenglings and Schells survived by cultivating a loyal following near their home base. There are also examples across Europe of the strong regional player. In Oregon, the Blitz/Weinhard brewery survived well into the craft era (1999), selling a million barrels of beer in the Northwest. Indeed, where you have strong local breweries, they often far out-sell national competitors. Because, even when national brands do have good national networks, they can't outcompete brands with a home-court advantage.

Ninkasi is a good example of a strong regional brand. Most of the production is sold in Oregon, and nearly all of it is sold in the Northwest. They do very well in Portland and Eugene. It's easy to imagine Ninkasi growing to a quarter million barrels of beer based on sales on the west coast alone. New Glarus has managed to grow to be the 27th largest brewery in the US by and they only sell beer in Wisconsin. (Rogue, which sells nationally, is the 41st largest. Ninkasi is 43rd.)

The market is poised to nurture these kinds of breweries, too. Because the national market is getting so tight, building a base near home will be easier, cheaper, and more stable. It allows breweries to cater to local preferences and respond to local trends. Customer engagement is easier when your footprint is five, rather than fifty, states. And given that the craft segment is likely to continue to grow for the next decade or two, breweries can continue to grow themselves without becoming predatory.

It also occurs to me that these forces will make maintaining national brands a constantly-challenging prospect. If the entire country is chunked up by strong regional players--imagine fiefdooms dominated by Brooklyn, Bell's New Glarus, SweetWater, Abita, Harpoon, Victory, Great Lakes, etc.--the national brands will be fighting against locals everywhere they go. That was the reason consolidation happened in the first place--it was easier to buy regional brands than out-sell them in local markets.

The idea of being a 5m-barrel national brewery must be enticing to ambitious breweries, but shooting for 500,000 barrels and regional dominance might make more sense in the long run, especially if you want to remain an independent.